Reward or Recognize?

Reward or recognize? In the past these two types of incentives have been seen as competing against one another particularly during the implementation or refinement of customer loyalty programs. However, companies are now looking at combining the two. The goals of every loyalty program should be acquire new customers while keeping the retention rate of current customers high.

Even if just testing the waters, loyalty programs need to provide value from the time the application is filled out

The idea behind loyalty programs is to establish a link between your business and your customer. This in turn sets up barriers of entry for your competition. However, as the popularity of these programs grow, it is likely your competitors have already started one and you customers have already signed up. This makes the competitive advantage of the system in itself less valuable.

One benefit the remains constant is the ability of the programs to allow you to collect more data about your customer. This data is not only collected during transactions, but a good majority of it at the time of application. Because it is this data that allows you to better segment your customers and identify common needs across groups. Once this is done, you are in a position to better communicate with them on an individual basis.

When launching a loyalty program, businesses need to immediately reward the consumer at the time of enrollment. One nationally known chain drug retailer gives no bonus points for applying for a customer loyalty card, limits rewards to loyalty program members who exceed a schedule of point totals, and controls redemption of points by mailing product discount coupons to program members as points are earned. Adoption of the customer rewards program was relatively slow. Only 15 percent of the retailer's transactions were with customers involved in the program over the first 18 months. Companies that are testing the waters of loyalty programs sometimes take this conservative, incremental approach. They are unsure of their ultimate goals and resist any technology investment until value is proven.

However, consumer recognition must also be considered as an important component of a customer loyalty program. First-time participants should receive immediate incentives for future purchases as well as just enrollment. One Canadian chain invites all consumers to apply for a loyalty program card, gives them 5,000 bonus points upon application, and allows them to save points toward free products. It also gives customers the opportunity to redeem points at each transaction and turn them into product discounts. As expected, adoption rates were much higher than those in a program above. The retailer saw 50 percent of its transactions processed through the loyalty program in less than a year.

Many retailers have resisted all out consumer recognition programs. Concerns have stemmed from two main areas: cost and technical capabilities. Unsure of customer response, companies don't want to be over zealous in rolling out the program and wind up giving away the store. Also, they worry the technical demands to gather information and correctly segment customers for targeted incentives all well beyond their capabilities.

Rewards keep high-value customers and recognition extends consumer loyalty deeper into the customer base

Why do you need to consider both approaches? A rewards program does well in attracting and retaining high-value customers, who in reality are only a small percentage of the overall customer base. Consumer recognition extends the loyalty program to customers with a lesser value currently. It is this market that must be tapped to increase sales and overall revenue. First movers will also find it helpful in attracting lower-volume customers away from competitors and consolidate their purchases. This will increase the volume and thus their value over time.

Companies are now starting to come forward with measurements of success and insights into how they were achieved. What they found was that technology alone did not guarantee their success; they found they had to be a combination of technology, data, and business goals with measurable results. Some common findings are:

Analyze data with an eye on desirable economic outcomes -- Make sure you establish what you are trying to accomplish with the program. These outcomes should differ for different groups of customers. That is why a segmentation exercise should be done in the first steps of program development.

Continually measure the performance of loyalty program -- All too often these programs are started and then left to run by themselves. Rarely, to companies go back to see if they were successful in changing their customer behaviors as planned.

Quantify the success of benefits in driving shopping behavior -- Some of the things you can look at are changes in the size of the market basket, increases in use of products or services, amount of transactions involving loyalty program ID numbers, and the amount of redemptions being made.

Benefits for loyalty programs included customer attraction, acquisition, retention, and turning low-value customers into high-value customers. Companies are also finding out which segments of their customer base they had the most success in behavioral changes. Once this is discovered, you can now market to others with the same attributes.

The information and the technology requirements to manage an effective customer loyalty program are not trivial. A large amount of data and sophisticated analytical tools are needed to segment out the occasional customers from the and high value ones. Even higher-powered analytics are necessary to determine what drives behavior in those segments and cluster levels. It takes time and patience. In some cases, programs were in place for several years before companies were able to achieve the desired changes in behavior. However, in today's economic climate loyalty programs can help companies do more with less. They have been able to provide a sense of personal service without an actual person. They are also allowing companies to understand who the most valuable customers are and who are simply looking for discounts. This will be of great value down the road as companies look to provide better service and offerings to the customers that deserve them.

About the Author
Kevin Scott is a senior analyst, customer management service with AMR Research.